New Jersey Fund Move Could Clarify Prices

State Pension Manager's Attempt to Sell Positions in Real-Estate Private-Equity Funds Is Being Closely Watched

By

Craig Karmin

Feb. 12, 2013 10:25 p.m. ET

The murky world of real-estate pricing by private-equity funds is about to become a little less murky.

That is thanks in large part to New Jersey's state pension fund, which disclosed last month that it is putting on the block $1 billion of its positions in about 20 to 30 real-estate private-equity funds.

ENLARGE

The sales effort is a way to reduce exposure to some of the high-risk, high-return property funds that got scuffed up during the financial crisis, said Timothy Walsh, director of the New Jersey Division of Investment, which manages the state's pension money. The fund wants to move some of that money to overseas real estate and foreign real-estate stocks, he said.

Some of the funds "are underperforming," Mr. Walsh said. The pension fund also wants to reduce its number of property-fund managers.

The sale would be the largest of its kind if completed and is being closely watched by pension funds and other large investors. High-risk, high-return funds like most of those that New Jersey is selling interests in, control tens of billions of dollars of property world-wide.

The performance of these funds will help determine whether some pension funds and other institutions can meet their future obligations to teachers, firefighters, retirees and others.

During the early years of the financial downturn, the value of high-risk, high-return real-estate funds fell 54% from their peak at the end of 2007 to the bottom in 2009, according to an index tracked by the National Council of Real Estate Investment Fiduciaries. Fund values are below 2007, but they are up 34% from the bottom, the council says.

But exactly what these funds are worth remains a subject for debate in property circles. Real-estate experts point out that valuing real estate is more subjective than valuing most other investments. Two neighboring buildings, for example, can be worth very different prices, depending on when leases expire, the credit quality of their tenants and the age of the buildings.

If New Jersey attracts strong demand in its sales effort, it will be a sign that commercial-real-estate values are getting stronger. But a heavily discounted sale to the $1 billion face value—or if New Jersey pulls it off the market—could sour sentiment toward these funds during their fragile recovery.

That could make pension funds more suspicious of the slowly rising values that many fund managers have been assigning to their properties and funds when reporting annual results. "There's going to be some investor trepidation," said Christian Busken, a real-estate analyst for Fund Evaluation Group, which advises institutional clients.

Typically, sales of fund holdings of the kind New Jersey is planning are done quietly, without any public scrutiny. The results of New Jersey's efforts are unlikely to be made public but are expected to be known within the real-estate community.

In one large transaction recently, NorthStar Realty Finance Corp., a real-estate investment trust, said in a December securities filing that it has agreed to buy partial interests in 51 real-estate funds with a net asset value of $765 million. Positions in funds from Blackstone Group, Morgan Stanley and Lubert Adler are among those that are being purchased, say people who were apprised of the portfolio.

Northstar identified the seller only as "a financial services organization." According to people briefed on the deal, the seller was TIAA-Cref, the giant retirement and asset manager. A Northstar official and a TIAA-Cref spokeswoman declined to comment. The sale price hasn't been disclosed.

Sales of real-estate fund positions by pension funds and other large institutions have been rare because only a handful of real-estate managers focus primarily on buying real-estate fund positions from other investors. These managers have combined assets of only $3 billion or so, said Partners Group, one of the biggest buyers of real-estate fund interests.

Investors also have been reluctant to sell because getting out of these positions often means swallowing big mark-downs and, in effect, acknowledging a mistake.

Stanford University looked to dump as much as $1 billion in private partnerships in late 2009. It decided against a sale after it determined its portfolio's liquidity had improved with the recovering stock and bond markets. But the endowment also received scant interest for its real-estate holdings when it was marketing the funds, according to a person with knowledge of the bidding process.

Around the same time, Harvard University got a tepid response when it tried to sell stakes in more than 30 real-estate funds, including interests with prominent names like Lone Star Funds, Lubert Adler and Westbrook Partners, say real-estate fund officials. Harvard sold only a small amount of its portfolio, these people say.

Mr. Walsh at the New Jersey Division of Investment said he expects better because the financial climate is calmer today, adding "if we don't get the expected prices and terms," the pension fund won't sell.

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